- MMT supporters are right to call for more spending, but they can still be more progressive, said Paul Krugman.
- Where the MMT sees taxes as the best way to slow inflation, Krugman argued that the Fed can do the same.
- You can count on the Fed to slow inflation down and also allow the government to spend more and keep taxes low, he said.
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Modern monetary theory economists are the pioneers of the left in the field. Nobel laureate Paul Krugman says he’s further than them.
Both schools are inspired by the great 20th-century English economist John Maynard Keynes, whose fiscal stimulus theory influenced not only FDR’s response to the Great Depression of the 1930s, but also $ 5 trillion in federal spending in the 1930s. middle of the coronavirus.
Krugman was one of the “neo-Keynesians” who worked to integrate his theories into the neoclassical economics of the 1950s and beyond. But in recent years, MMT has advanced that legacy, arguing that since the United States is the only power that can print U.S. dollars, the government can spend first without raising cash through taxes.
Where the dominant political strategy sees budget deficits as the biggest obstacle to spending, the MMT says inflation is the biggest risk. Taxes can then be used to slow inflation by curbing the money supply, according to the theory.
Krugman says policymakers can also count on the Fed to handle inflation, and that’s actually more progressive economic policy.
“MMTs, at least if they conform to their own doctrine, are substantially to the right of people like me,” Krugman told Insider earlier this month. “MMTs don’t seem to believe that monetary policy can ever be used for anything useful.”
The MMT framework existed on the fringes of economic policy before the COVID-19 crisis, but Treasury Secretary Janet Yellen has said that as long as interest rates remain at historically low levels, the government should spend what is necessary to fuel economic recovery. It’s a sharp reversal of the Obama administration’s approach, which has been hampered by fears of deficit spending and growing national debt.
While deficit fears took center stage in 2009, inflation is the greatest risk to the resumption of the pandemic era. One camp, led by conservatives and moderate Democrats, fears the unprecedented spending and
Low exchange rates can trigger the worst inflation crisis since the 1970s.
The other, in which Krugman resides, sees inflation cool once the reopening is complete and the country settles into a new normal. But while supporters of MMT see taxes as the key weapon to curb inflation, Krugman believes policymakers can count on the Fed to control price growth.
MMT supporters may therefore be “more cautious and less willing to engage wholeheartedly in progressive policies” than those who value the power of the Fed, he added.
While the economy has yet to fully rebound, Krugman sees a repeat of Obama’s-era concerns potentially the biggest mistake policymakers make during the recovery.
President Joe Biden has spent an additional $ 4.1 trillion on infrastructure and care programs in recent weeks, along with several tax increases that are expected to pay for most plans. Such payments are attractive to those worried about the budget deficit, but in practice they could prevent the recovery from reaching its full potential, Krugman said.
Passing more spending packages while leaving taxes intact could prevent the United States from entering a demand-slack recovery like the one seen after the Great Recession, he added.
“What the doctor ordered is moderate and sustained deficit spending,” he said. “That’s what worries me a little. That we are still too concerned with fiscal responsibility and not sufficiently concerned with the continuing weakness in demand.”